In November 2008, the ACLI requested that the NAIC consider nine industry proposals - one of which relates to reinsurance collateral relief - that would have the effect of increasing life insurers' reported statutory capital and surplus on their December 31, 2008, annual statements. As to reinsurance collateral, the ACLI explained that ceding insurers are experiencing temporary difficulties in reserve financing because letters of credit ("LOC") capacity is severely limited and the market value of trusteed assets has declined significantly. The ACLI asked the NAIC to issue guidance to reflect that a Commissioner's discretionary authority under the Credit for Reinsurance Model Law and Model Regulation (i) be applied to expand available collateral (such as accepting LOCs from entities other than Qualified U.S. Financial Institutions), and (ii) be used to establish criteria for expediting accreditation of assuming insurers before year-end 2008.
To consider the nine proposals, the NAIC established a Capital and Surplus Relief (EX) Working Group, which published a draft recommendation. On the reinsurance collateral relief proposal, although some commentators noted that state insurance commissioners already have discretion to provide the relief requested by the ACLI, the Working Group recommended that the NAIC publish "Guidance" for insurance commissioners to follow when exercising discretionary authority with regard to (i) permitting "other forms" of reinsurance collateral security beyond those specifically authorized under the Model Law and Regulation; and (ii) determining whether an institution meets the criteria to be considered a "Qualified U.S. Financial Institution" that can issue LOCs or hold reinsurance trust assets. The draft recommendation also recharacterized and rejected the accreditation element of the ACLI proposal, with the Working Group observing that it would be inconsistent with regulatory objectives to expand the Accredited Reinsurer status to SPVs and that this type of expansion would be outside a Commissioner's authority under existing law.
The Working Group has now published a draft Guidance Memorandum as well as a draft Model Bulletin that commissioners may use in publicizing their positions. The Guidance Memorandum states that it is intended to provide only general guidance to Commissioners and not to be a binding interpretation, and that it is not intended to amend existing law or expand current practice. Following are key points from the draft Guidance Memorandum and Model Bulletin:
- As to a Commissioner's discretionary authority to permit any "other form of security" as reinsurance collateral:
- Such authority should be applied on a case-by-case bases only after careful and thorough evaluation, and the authority is not intended to allow a ceding insurer to take credit in excess of the amount of the collateral.
- The collateral must be held in the United States and be subject to withdrawal solely by, and under the exclusive control of, the ceding insurer, or in the case of a trust, held in a Qualified U.S. Financial Institution.
- The collateral should be provided for the sole benefit of the ceding insurer, be in a form immediately and unconditionally available to it, and provide the same degree of security as the provisions explicitly included within the Model Law and Regulation.
- LOCs should be issued or confirmed by Qualified U.S. Financial Institutions, unless otherwise permitted by existing law and regulation.
- As to determining whether an institution is a Qualified U.S. Financial Institution:
- The institution must meet the requirements of Sections 4(A)(1)-(3) of the Model Law.
- The SVO maintains a "Bank List" identifying institutions the SVO has determined meet the Model Law's requirements, and regulators tend to defer exclusively to the SVO's analysis and accept only listed institutions.
- For unlisted institutions, Commissioners may require the institution to apply to the SVO for review. The review process ordinarily takes approximately 30 days.
- The Guideline also states that the Model Regulation requires that an LOC be effective no later than December 31 for reserve credit purposes, but that it allows a ceding company until the annual statement filing date to have the LOC in its possession or trust.
The Working Group will be holding a public hearing on its draft recommendation in Washington, D.C. on January 27, 2009. The Working Group will also be accepting written comments on the draft Guidance Memorandum and Model Bulletin (as well as on all other aspects of its draft recommendation) for consideration at the public hearing.